The Separation Theorem Says That

question 21

Multiple Choice

The separation theorem says that

• A) expected return of a portfolio is separate from its variance. investment decisions can be made separately from consumption decisions.
• B) lending decisions can be made jointly with borrowing decisions.
• C) systematic risk and unsystematic risk should be considered separately.
• D) variance of a portfolio is separate from its covariance.

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Definitions:

Savings Account

A deposit account held at a financial institution that provides principal security and a modest interest rate.

Semiannual Payments

Payments made twice a year, often used in the context of bond interest payments or certain types of loans.

Compounded Semiannually

Interest calculation method where interest is added to the principal sum of a deposit or loan twice a year, resulting in interest earning interest.

Compounded Annually

A method of calculating interest where the interest earned each year is added to the principal, leading to an increase in the amount of interest earned in subsequent years.